Bitcoin – What It is

Bitcoin is a thing of interest for the mildly laid-back. I started watching when it was 95.99 Cdn/BTC and today it’s 341.97 Cdn/BTC at Bitcoinity. I don’t mourn for lost speculation gains, as I’m not a big risk taker, but I do see that it’s gaining traction and respect.

So I started to do my own research.

More and more people are concerned about the affairs of governments, their currency values, and the banks. If trust is lost in those areas then it has to move somewhere else. Seems that one of those places is Bitcoin.

WHAT IS BITCOIN?

Bitcoin is a currency – a way to exchange things of value.

Bitcoin is more specifically a virtual fiat currency.

It’s virtual because Bitcoin is used to exchange value throughout the world through the internet person-to-person, instead of physically within a country hand-to-hand. And it’s a fiat currency because it’s not backed by anything of intrinsic value, like gold or silver.

Most of the currencies in the world are fiat – US dollars, Chinese yuan and Canadian dollars, for example, are all fiat currencies backed by nothing of intrinsic value.

Bitcoin (and all fiat currency) is backed by two things – its users’ belief in the value of the institution creating it, and belief in the value of the institution managing it.

Bitcoins are created and transactions are managed by a community of developers who are not centralized. So it’s not controlled by a single entity, and transactions are not tracked. Many people believe this makes it corruption proof and more valuable.

With every fiat currency the users trust that the creators will maintain its value so they can hold it and spend it tomorrow instead of today for the same amount of goods and services. They also trust that the institution managing it will provide safe and secure exchange for a fair fee, in a fair amount of time.

Government fiat currencies also have value because each country’s government uses it and requires their citizens to pay taxes using their respective currency as well. So citizens trust that it will be in use tomorrow and the next day, and it becomes the common means of exchange.

CURRENCY FEES

All fiat currencies exchange things of value for a fee. We pay a fee to a bank for using currency as the way of exchange through a bank account, instead of using barter or personal IOUs.

The fee is collected by a bank which is owned by shareholders. The bank’s shareholders profit by collecting the fees for every dollar used for exchange.

With Bitcoin it is free to use, and a fee is paid by choice to speed the confirmation of a transaction.

TAXES FOR BITCOIN

Governments currently view Bitcoin as a type of barter, and a person or business claims their income from Bitcoin based on the value of the goods and services in their own country’s currency.

BITCOIN ACTS LIKE A COMMODITY

Bitcoin rises and falls in price just like other fiat currencies. They follow the rules of supply and demand, and rise and fall throughout the day against other currencies. Some people speculate, buying and selling currencies hoping to make a profit. Some speculate with Bitcoin in the same way.

The value is all based on the belief that one currency is more safe and secure than another, and that the country or community creating the currency will keep it valuable.

The more units of a currency there are then the less each unit is valued, therefore the creator shouldn’t make too many too often. For example, the more US dollars the government creates with QE (quantitative easing aka money printing), the less each one is valued – it takes more of them to buy the same things. In other words, the price of bread goes up.

If all trust is lost in the institution creating the currency, or if the fees are too high, or there are too many of each unit, then the currency can go into hyperinflation, loses all value and stops being used – like the Argentina, Weimar Republic and Zimbabwe currencies in the last century.

This will probably happen to Bitcoin at some point in the future too. Advocates say that it is encrypted and developed in such a way that it cannot be manipulated and devalued, which would be great, so we’ll see how that plays out. Currencies usually last about 27 years, so this one has years to go if it starts being mainstream. Owning any currency in any bank is speculating, and so it’s probably good to view Bitcoin that way too.

Many of the leading specialists recommend owning real assets with intrinsic value like land, gold, silver or fine art.

BITCOIN’S VALUE

A growing number of people believe Bitcoin will increase in value and that it is a safe and secure means of exchange.

They believe that the community of creators have put safeguards into the cryptology in order to not have too many created. They also believe that the fee for use is fair in exchange for speed of service.

It is decentralized and maintained by a community of open-source developers. Bitcoins are created by a number of unrelated parties, who create the bitcoins by solving mathematical puzzles, and are rewarded with bitcoins (called mining).